Why AnandRathi downgraded Bajaj Auto to ‘Sell’ from ‘Buy’

Brokerage AnandRathi has downgraded Bajaj Auto  to “SELL” from “BUY” citing de-rating of price earnings multiple of stock in the short term on weak two-wheeler’s demand and lower EBITDA margins.

Bajaj Auto reported on Tuesday its lowest domestic monthly sales in June since December, 2009. The numbers were largely impacted by sluggish two-wheelers demand and the ongoing strike at Chakan plant where workers are demanding wage revision along with 500 equity shares of Bajaj Auto at rupee one apiece.

AnandRathi lowered its target price to Rs 1721 from Rs 2131 earlier. Shares of Bajaj Auto closed at Rs 1895, down Rs 22 or 1.17 percent on Wednesday.

# Key Takeaways From The AnandRathi Report

“For Jun’13, Bajaj Auto reported sales of 295,749 units (14.3 percent lower Y-o-Y, 12.8 percent M-o-M), less than expected. While threewheelers grew from a lower base, motorcycles were particularly disappointing, declining 20 percent Y-o-Y.”

“Three-wheelers grow on a lower base. Three-wheeler sales grew 53.8 percent Y-o-Y to 41,205 units. However, this was on the lower base of the previous year (supply disruption in Sri Lanka). YTD growth for three-wheelers was 23.6 percent, while the residual growth estimate is 6.6 percent.”
“Even after factoring a loss of production due to labour issues at the Chakan plant (20,000 units, management estimate), motorcycle sales were 13.8 percent lower Y-o-Y. At 254,544 units, these were the lowest bike dispatches for the company since Dec’10. YTD motorcycle sales were down 12.5 percent Y-o-Y; the residual growth estimate is 6.4 percent.”
“The demand outlook for FY14 is dim, both for domestic as well as exports. The key positive is better export realisations and a low base of the healthy-profitability three-wheeler division. However, demand weakness and keener competition would result in market share loss and cost pressures, ultimately weighing on profitability.”
“We lower our estimates to factor in the weak two-wheeler demand and lower EBITDA margin. We downgrade the stock to a Sell as we expect fewer volumes to result in a PE de-rating in the short term. At our price target of Rs 1,721, the stock would trade at a PE of 15.4x FY14e and 13.4x FY15e. At the ruling price, it trades at 17.3x FY14e and 15x FY15e EPS; we expect valuations to shrink in the short term.”
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